By Brigette Bailllie, Karel Potgieter and Shoneez Rugan

Since the enactment of the Constitution of the Republic of South Africa, 108 of 1996 (“the Constitution”), Public Private Partnerships (“PPPs”) in South Africa are fast becoming an established means of procurement of goods and services from the public sector.

In this article we set out a brief overview of the regulatory framework governing PPPs in South Africa.

This overview commences with a discussion of the primary legislation governing PPPs, at a national, provincial and local (municipal) level which are, in brief, section 217 of the Constitution; the relevant provisions of the Public Finance Management Act, 1 of 1999 (“PFMA”); Treasury Regulation 16 (issued pursuant to the PFMA); the relevant provisions of the Municipal Systems Act, 32 of 2000 (“MSA”); the relevant provisions of the Municipal Finance Management Act, 56 of 2003 (“MFMA”); the Municipal PPP Regulations (issued pursuant to the MFMA) and the standardised PPP provisions (issued pursuant to a National Treasury practice note and commonly referred to as “Standardisation”).

In this article we also discuss the role of the dedicated PPP Unit within National Treasury (the South African Finance Ministry) followed by a discussion of some of the developments within the South African PPP market, to date.

Regulatory Framework and its Watchdog

The foundation of all public procurement can be found in section 217 of the Constitution, which states that “when an organ of state in the national, provincial or local sphere of government, or any other institution identified in national legislation, contracts for goods or services, it must do so in accordance with a system which is fair, equitable, transparent, competitive and cost-effective”.

The most effective way in which an organ of state can comply with section 217 is through an open, public, transparent and competitive tender process in which all tenderers are treated fairly and equitably. As will be discussed, the PPP regulatory framework embraces the principles of section 217.

As mentioned above, the relevant legislation governing PPPs at a national and provincial level are sections 31(1)(a)(iii), 51(1)(a)(iii) and 76(4)(c) of the PFMA and Treasury Regulation 16.

Sections 31(1)(a)(iii) and 51(1)(a)(iii) apply to government departments (national and provincial) and state owned entities respectively. Both sections require the relevant accounting authority of the relevant department or state owned entity to have “an appropriate procurement and provisioning system which is fair, equitable, transparent, competitive, and cost-effective”.

Section 76(4)(c) of the PFMA states that “National Treasury may make regulations … concerning the determination of a framework for an appropriate procurement and provisioning system which is fair, equitable, transparent, competitive and cost-effective”. National Treasury has in terms of this provision, issued Treasury Regulation 16 which set out the procurement framework in respect of PPPs. In addition to the constitutional principles of public procurement, Treasury Regulation 16 prescribes that all PPPs conform to the requirement of affordability, value for money and adequate risk transfer from government to the private party.

Treasury Regulation 16 further prescribes the procedures to be followed by government when entering into a PPP. For instance, Treasury Regulation 16 requires government to acquire National Treasury approvals at each stage of the procurement phase. These include Treasury Approval: I (“TA:I”), Treasury Approval: IIA (“TA:IIA”), Treasury Approval: IIB (“TA:IIB”) and Treasury Approval: III (“TA:III”).

TA:I is achieved once the relevant government department has embarked on a feasibility study in respect of the proposed project. The purpose of the feasibility study is to establish whether the proposed PPP will be of strategic and operational benefit to government and must illustrate that the proposed PPP will meet the 3 regulatory requirements of affordability, value for money and adequate risk transfer.

The procurement phase of the PPP begins once TA:I has been obtained. Government must prepare the procurement documentation, which will set out the relevant tender process. TA:IIA is achieved once government has complied with this requirement.

Once TA:IIA is obtained, the tender documents issued and the responding bids received may be evaluated by an evaluation committee. Government must certify that its evaluation scorecard meets the criteria of affordability, value for money and adequate risk transfer. This forms the basis for TA:IIB pursuant to which a preferred bidder will be selected to commence negotiations with government to conclude the PPP agreement.

The successful conclusion of the negotiation stage will lead to the submission for granting of TA:III. In order to obtain TA:III, government must certify, among other things, its capacity and competence to enforce, manage and monitor the PPP.

In turn, the legislation governing PPPs on a municipal level are the MFMA, the MSA and the Municipal PPP Regulations.

Whilst the MFMA deals will with procurement of any goods and services, the MSA only becomes relevant when such procurement is related to “municipal services” such as electricity, water and sanitation. If the private sector is contracted to provide services on behalf of the municipality, as in the case of PPPs, both the MFMA and the MSA will apply.

Section 168(1)(d) of the MFMA enables government to “make regulations or guidelines applicable to municipalities and municipal entities, regarding a framework regulating the financial commitments of municipalities and municipal entities in terms of public-private partnership agreements”, which provision led to the enactment of Municipal PPP Regulations.

While the decision-making and institutional processes in respect of Municipal PPP Regulations differ from that of Treasury Regulation 16, the regulatory requirements of affordability, value for money and adequate risk transfer are consistent in both regulations.

In addition to the above regulatory framework which deals specifically with PPPs, the execution of PPPs must comply with sector specific legislation. An example of this are correctional services PPPs in South Africa, which are also regulated by the Correctional Services Act, 111 of 1998. This Act affords “step-in” powers to the Commissioner of Correctional Services in respect of PPPs.

The South African PPP legal framework is further implemented using Standardisation, which is used to guide both government and the relevant private sector participant (the “Private Party”) through the cycle of PPPs. Standardisation as issued pursuant to the PFMA and Treasury Regulation 16. It regulates PPPs on a national and provincial level whereas the Municipal Service Delivery and PPP Guidelines, issued by the PPP Unit, form the basis of Standardisation at a municipal level.

Not only does Standardisation prescribe how key issues should be dealt with in a manner that achieves the regulatory requirements of affordability, value for money and adequate risk transfer, it also sets out clear-cut contractual terms of the relevant PPP Agreement, such as the Private Party’s commitment to socio-economic development and black economic empowerment.

While it is clear that South Africa has an elaborate PPP regulatory framework, this would mean nothing without a supervisory body to ensure that all PPP Agreements observe the relevant regulatory requirements. The PPP Unit within National Treasury has been established to do precisely this. In order to fulfil its functions, the PPP Unit is tasked with providing technical assistance to government in establishing and managing PPPs and also to provide the necessary Treasury Approvals at each stage of the PPP phase.

Developments and Challenges

To date, the South African government has concluded a number of PPP projects. A few of them worth mentioning is the world’s largest rail PPP, which is the ZAR23 billion, Gautrain Rapid Rail Link PPP for the design, construction, operation and maintenance of a public rail transportation system. There is also the 25 year long Head Office Accommodation PPP in respect of the Department of Trade and Industry, having a unitary payment of ZAR870 million.

Although South Africa boasts an elaborate PPP regulatory framework which is capable of rolling out PPPs of this calibre, the roll out of PPPs has generally been slow. On average, only 3 PPPs have been successfully concluded per year since 2000. One of the reasons for this slow roll out is the time it takes to conclude a PPP successfully. This period generally ranges from 24 months to 36 months from the pre-qualification stage to financial close.

Conclusion

It is comforting to know that the government has indicated that it is committed to the development of more PPPs. The government is currently in the process of reviewing Standardisation and invited the public for its comments in this regard in early 2009.

While we are confident that the government will be willing to give effect to any changes required in order to streamline the legislative framework governing PPPs, we are eagerly awaiting the outcome thereof.